LD Capital Macro Commentary: When will Hong Kong stocks start to rebound?

First, the trend of Hong Kong stocks review

Looking back at the trend of Hong Kong stocks over the past decade, the HSI experienced two major upward movements from February 2016 to January 2018 and March 2020 to February 2021.

The first period of the rally coincided with the Fed's interest rate hike and balance sheet reduction, but the Hong Kong stock market continued to rise without being constrained by the tightening of external liquidity, as the supply-side reform and shantytown reform implemented by the central government in 2016 promoted the opening of the domestic investment and real estate cycle, driving the strong growth of the domestic economy. From this wave of market, it can be seen that the core factor that dominates the performance of the Hong Kong stock market is internal growth rather than the external environment.

In the second stage of the upward trend, the central government issued 1 trillion yuan of special anti-epidemic treasury bonds against the backdrop of the global new crown epidemic, and at the same time, due to the relatively small disruption of the epidemic to the domestic supply chain, the economy has achieved rapid recovery and the stock market has performed strongly.

In the past 1 year, the Hang Seng Index has rebounded first and then fallen. Benefiting from the expectation of economic recovery after the opening of the epidemic in China and the marginal loosening of the Federal Reserve, the market has bottomed out since November 2022. The Hang Seng Index continued to rise from 15,000 points on October 31, 2022 to a high of 22,700 points on January 23, an increase of more than 50%.

Later, due to factors such as weaker-than-expected domestic growth and sticky inflation in the United States, the market ended its rebound momentum. Hong Kong stocks have been among the lowest in the world so far this year, underperforming major global indices, including A-shares, and weaker than the Nasdaq and Nikkei, which rose 36% and 28%, mainly due to the withdrawal of foreign capital and concerns about the recovery of domestic growth.

The earnings ratio of the Hong Kong stock market has shrunk to 8.47 times, which has come below 1 standard deviation of the long-term average.

Second, the main influencing factors of Hong Kong stocks

1. External environment

Due to the nature of the open financial market, Hong Kong stocks are usually more susceptible to the external environment. The Federal Reserve's monetary policy affects the Hong Kong stock market through liquidity and valuation, especially in the growth sectors represented by industries such as Internet technology and biomedicine.

The FOMC Fed paused interest rate hikes again in November, coupled with the weak economic data in October and the slowdown in the pace of fiscal bond issuance, triggered general optimism in the market, and the US Treasury interest rate fell rapidly, falling to about 4.4% after a high of 5% in mid-October.

The overall CPI and core CPI fell more than expected in October, with the US CPI in October being 3.2% year-on-year and the core CPI being 4.0% year-on-year, lower than market expectations. Domestic gasoline prices in the United States fell as concerns about the impact on the oil market due to the Israeli-Palestinian conflict eased, mainly due to the decline in energy and used car prices.

The non-farm payrolls cooled down significantly, and the unemployment rate rose slightly. On November 3, 2023, the U.S. Department of Labor released the U.S. non-farm payrolls data for October 2023, adding 150,000 non-farm payrolls, lower than the expected 180,000 and only half of the previous value. The unemployment rate edged up by 0.1 percentage points to 3.9%.

U.S. Nonfarm Payrolls (10,000 people) in Oct

U.S. unemployment rate for October

The US ISM manufacturing and non-manufacturing PMIs both fell to 46.7 and 56.8, respectively. The Markit manufacturing PMI fell back into contraction territory again, and the services PMI rose slightly.

The U.S. Treasury slowed down the pace of U.S. bond issuance at the fourth-quarter refinancing meeting due to unsatisfactory long-term bond auction results and the possibility of a phased improvement in the U.S. fiscal deficit in the fourth quarter. The Treasury Department's fourth-quarter net issuance based on the recommendations of the Treasury Borrowing Advisory Committee (TBAC) is $776 billion, down $76 billion from the estimated size in the August refinancing meeting, and the actual net issuance in the fourth quarter is expected to fall to $605 billion after excluding the Fed's $171 billion net redemption. After the news was released on November 1, the market reacted positively, and the yield on the 10-year US Treasury note fell significantly. However, the actual situation of the treasury bond auction in November still reflects the lack of demand, and the fiscal pressure has not been fully eased. The bid-to-cover ratio of long-term bond auctions fell simultaneously, with the highest yield rates of 3-year, 10-year, 20-year and 30-year U.S. bond auctions all higher than the market interest rate (when-issued yield) on the same day.

Falling inflation, slower growth, and some easing of fiscal expansion concerns have led to a high probability of a halt to rate hikes in December, with CME rate futures now implying a 95.5% probability of no rate hike in December. Looking ahead, the downward trend of U.S. bond interest rates is the general trend, and the rhythm may show a stepwise decline.

2. Domestic economy

The price level shows that the overall momentum of domestic inflation recovery is weak. On November 9, the National Bureau of Statistics released price data for October 2023, showing that the national consumer price fell by 0.2% year-on-year and 0.1% month-on-month. The decline in CPI was mainly affected by the decline in food prices, mainly pork, and post-holiday consumer demand. The price of livestock and meat decreased by 17.9%, affecting the CPI by about 0.66 percentage points, of which the price of pork decreased by 30.1%, affecting the CPI by about 0.55 percentage points, the price of eggs decreased by 5.0%, affecting the CPI by about 0.04 percentage points, and the price of fresh vegetables decreased by 3.8%, affecting the CPI by about 0.08 percentage points.

**In October 2023, the national industrial producer prices fell 2.6% year-on-year and remained flat month-on-month, mainly dragged down by means of production. **On a year-on-year basis, the price of means of production decreased by 3.0%, affecting the overall level of ex-factory prices of industrial producers by about 2.35 percentage points. Among them, the prices of mining industries fell by 6.2 percent, the prices of raw materials fell by 2.3 percent, the prices of processing industries fell by 3.0 percent, and the prices of means of subsistence decreased by 0.9 percent, affecting the overall level of ex-factory prices of industrial producers by about 0.24 percentage points. Among them, the price of food decreased by 1.2 percent, the price of clothing and general daily necessities both increased by 0.4 percent, and the price of durable consumer goods decreased by 2.0 percent.

On a month-on-month basis, the price of means of production rose by 0.1 percent, affecting the overall level of ex-factory prices of industrial producers by about 0.08 percentage points. Among them, the price of the extractive industry rose by 2.4%, the price of the raw material industry rose by 0.4%, and the price of the processing industry decreased by 0.2%. The prices of means of subsistence fell by 0.1 percent, affecting the overall level of ex-factory prices of industrial producers by about 0.04 percentage points. Among them, the price of food decreased by 0.3%, the price of clothing rose by 0.1%, the price of general daily necessities was flat, and the price of durable consumer goods decreased by 0.1%.

**At the end of October 2023, the stock of social financing was 374.17 trillion yuan, a year-on-year increase of 9.3%. **In October, the new social financing was 1.85 trillion yuan, an increase of 910.8 billion yuan year-on-year, of which the financing demand of residents and enterprises was weak, and the growth of social financing mainly came from government financing, ** 1.56 trillion yuan of new government bond financing in October accounted for 85% of the total new social financing of 1.86 trillion yuan. The balance of RMB loans was 235.33 trillion yuan, a year-on-year increase of 10.9%, the growth rate was the same as that at the end of last month, 0.3 percentage points lower than the same period last year, and the new RMB loans were at a relatively historical low.

At the end of October, the balance of broad money (M2) was 288.23 trillion yuan, a year-on-year increase of 10.3%, the growth rate was the same as that at the end of the previous month, and 1.5 percentage points lower than the same period last year. The balance of narrow money (M1) was 67.47 trillion yuan, a year-on-year increase of 1.9%, and the growth rate was 0.2 and 3.9 percentage points lower than that at the end of last month and the same period last year, respectively. The balance of money in circulation (M0) was 10.86 trillion yuan, a year-on-year increase of 10.2%. The net cash withdrawn in the month was 68.8 billion yuan. The scissors gap between M1 and M2 was -8.4%, down 0.2% from September, indicating that the overall saving tendency has not been alleviated, the degree of capital activation is still at a low position, and the economic operation is weak.

In terms of consumption, the total retail sales of consumer goods in October recorded 4,333.3 billion yuan, supported by a low base and the pre-launch of the Double 11 shopping festival, a year-on-year increase of 7.6%, and a growth rate of 2.1% compared with September. In terms of consumption type, the retail sales of goods in October were 3,853.3 billion yuan, up by 6.5 percent year-on-year, and the revenue from catering was 480 billion yuan, up by 17.1 percent, mainly related to the increase in demand for meals and trips during the National Day holiday.

In October, the added value of industrial enterprises above designated size increased by 4.6 percent year-on-year and 0.39 percent month-on-month. From January to October, the total profit of industrial enterprises above designated size was 6,115.42 billion yuan, down 7.8% year-on-year, 1.2 percentage points narrower than that from January to September, and the recovery of corporate profits slowed down.

Since August, measures such as recognising housing without recognising loans, reducing the proportion of down payments, and adjusting the interest rate of existing first home loans have been frequently introduced, and the policy side of various provinces and cities has continued to make efforts, and there have been a number of important developments recently:

(1) On November 17, the People's Bank of China, the State Administration of Financial Supervision and the China Securities Regulatory Commission jointly held a forum for financial institutions, proposing 1. "three not less than", that is, the growth rate of real estate loans of each bank shall not be lower than the average growth rate of banks, the growth rate of public loans to non-state-owned housing enterprises shall not be lower than the growth rate of real estate of the Bank, and the growth rate of personal mortgages of non-state-owned housing enterprises shall not be lower than the growth rate of mortgages of the Bank. 2. The regulator is drafting a white list of 50 state-owned and private real estate enterprises, and the listed enterprises will receive support from various aspects, including credit, debt and equity financing, and the scope of the list has been expanded compared with the beginning of the year; (2) On November 22, Shenzhen officially announced that the minimum down payment ratio for personal housing loans for two houses was adjusted from 70% for ordinary housing and 80% for non-ordinary housing to 40%, and the standard for ordinary housing was relaxed. (3) The People's Bank of China (PBoC) released the report on the implementation of China's monetary policy for the third quarter of 2023 released on November 27, pointing out that the macro-prudential management of real estate finance should be improved, and the reasonable financing needs of real estate enterprises under different ownership systems should be met without discrimination.

However, under the weak expectation of housing prices, there is no significant improvement in the current data, as of the current local policy effect is limited, the transaction area of commercial housing in 30 large and medium-sized cities is at a low level in the same period in the past five years, and the number of second-hand housing listings has stabilized recently, but the listing price index continues to decline.

From January to October, the national real estate development investment was 9,592.2 billion yuan, down 9.3 percent year-on-year, of which residential investment was 7,279.9 billion yuan, down 8.8 percent. The area of housing construction has continued to grow negatively year-on-year since May 2022, and there is no obvious turning signal as of October. In October, the real estate development prosperity index (hereinafter referred to as the "national housing prosperity index") was 93.40, declining for the sixth consecutive month.

The central government will issue an additional 1,000 billion yuan of treasury bonds in 2023 in the fourth quarter of this year, and all the additional treasury bonds will be arranged to local governments through transfer payments, focusing on supporting post-disaster recovery and reconstruction, making up for the shortcomings of disaster prevention, mitigation and relief, and improving China's ability to resist natural disasters as a whole. It is planned to use 500 billion yuan this year and carry forward 500 billion yuan to next year, and the national fiscal deficit will increase from 3.88 trillion yuan to 4.88 trillion yuan, and the deficit rate is expected to increase from 3 percent to about 3.8 percent. Fiscal expansion is expected to be an important starting point for boosting the market with loans from enterprises and residents.

3. Fund Flow

Both northbound and southbound funds saw net outflows last week. Southbound capital outflows totaled HK$406 million last week.

EPFR data shows that overseas active funds have been flowing out of the overseas Chinese stock market for the past 21 weeks.

Fourth, Summary

In the context of the Federal Reserve stopping interest rate hikes, the world's major regional funds have reduced their underweight to Chinese stocks and the introduction of domestic stimulus policies, Hong Kong stocks have not yet seen signs of foreign capital return, and the Hang Seng Index is still weak. While the economic data is still weak, Hong Kong stocks as a whole are still in the process of gradually bottoming out, and the sharp rebound depends on the increased confidence in the improvement of fundamentals. At present, the willingness of various sectors to increase leverage is weak, the recovery process is slow, and the transmission of easy money to easy credit is not smooth. The key to reversing the decline is also the continued development of fiscal and monetary policies to promote the opening of the credit cycle, the main of which may be the property market stimulus and the central fiscal leverage, which can be seen that the government is also moving in this direction. When the inflection point appears, we need to pay close attention to the next fundamental data and the continuous transmission and increase of policy support.